The property market shutdown earlier this year proved especially painful for buyers nearing completion. In a recent survey by Butterfield Mortgages of over 1,300 homeowners and would-be homebuyers, three in 10 buyers said they had lost their exchange deposit as a consequence, due to the shutdown taking place after contracts had been exchanged. If this figure is in any way reflective of the market as a whole, it implies that many thousands of buyers could have lost life-changing sums of money.
The exchange deposit – typically 10% of the property purchase price – is the sum of money that the buyer’s solicitor transfers to the seller’s solicitor at the time contracts are exchanged. It should not be confused with the mortgage deposit (though it forms part of that), which is the amount of cash or equity put up in addition to the loan. The exchange deposit provides security that the buyer will not pull out of the sale.
Disastrously for them, many homebuyers earlier this year were forced to pull out of sales through no fault of their own, after their contracts were exchanged. In the majority of cases, this is because their mortgage lenders were no longer willing to lend to those buyers, even if they had a mortgage-in-principle (MIP). As a result, these frustrated buyers will have lost an average of £23,000 each (based on the average UK property price). In some cases this may account for their entire mortgage deposit too – a devastating blow that will crush many dreams of home ownership.
At present, there is no indication that any of these buyers are entitled to compensation from the government to make up for losing their exchange deposits. However, given the number of transactions where this has apparently happened, it would be surprising if there were not calls for some form of deposit compensation scheme to be put in place.
Buyers frustrated despite having a mortgage-in-principle
The Butterfield research also found that more than half (52%) of homebuyers found themselves stuck mid-chain due to the shutdown, while four in 10 buyers had to pull out of their purchases after having an offer accepted. Many of these were among the 50% of prospective buyers who were denied a mortgage at the eleventh hour, despite have a mortgage-in-principle (also known as an agreement in principle). And more than half of these buyers were in the unfortunate group who had already exchanged, and so lost their deposits.
Alpa Bhakta, CEO of Butterfield mortgages, said, ‘The fact that many mortgage lenders withdrew products … during the lockdown has clearly had a damaging effect on property transactions. Indeed, today’s research shows that some buyers have lost their deposits, while others missed out on properties having been denied mortgages, despite having an agreement in principle.’ She added, ‘Positively, there are mortgage lenders who are continuing to issue loans and support homebuyers.’
Bhakta believes that pent-up demand for property will see sales pick up in the second half of the year, a prediction that has been made by many industry figures (though challenged by others). However, around one in eight homeowners who had been planning to sell have now changed their minds. Mortgage lending has also tightened up, with most high LTV mortgages (90% or above) withdrawn from the market. Thwarted buyers who now hope to jump back on the property ladder may therefore find the task is now even tougher than it was before.
If I lose my exchange deposit, can I challenge it?
The property market freeze due to the COVID-19 lockdown was an unprecedented set of circumstances, so it is likely that one or more homebuyers who lost their deposits may try to challenge this in court. However, based on previous cases this is still likely to be an uphill struggle, unless the government intervenes with compensation, as courts generally favour the seller.
A 2016 case in the High Court of England and Wales (Rock v Reddy) involved a buyer facing a delay in raising their mortgage (i.e. a similar sort of predicament to those buyers hit by the property freeze). The buyer was offered a 10-day extension to complete the purchase, but still failed to raise the money, and so lost their deposit of £430,000. The case was brought by the buyer seeking to challenge this decision, but the court ruled that the buyer was in breach of contract and that the seller was entitled to keep the deposit.
The coronavirus lockdown may offer more mitigating circumstances than the Rock v Reddy case, however. If one homebuyer can bring a successful case to recover their deposit, others may follow.
How can I maximise my chances of a successful mortgage application?
The property market freeze was another reminder of how vital it is to have the strongest possible mortgage application in place. Most of the buyers whose purchases fell at the last hurdle will have been those with high LTV offers, i.e. products that lenders withdrew as the crisis hit. The 50% of buyers who managed to secure their mortgages despite the freeze will have been seen by lenders as more secure prospects, with stronger mortgage applications.
One way to boost your chances is to speak to an independent mortgage broker. A mortgage broker can identify the lender and the product who is best for you, and advise you on the maximum you can borrow without putting your application at risk. This will also increase your chances of receiving an offer at the first attempt – always helpful, as delays can disrupt your property chain or even put your deposit at risk.
A version of this article was previously published by Unbiased 24th June 2020